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International Business
Environments & Operations

15e

Daniels ● Radebaugh ● Sullivan

International Business Environments and Operations 15e by Daniels, Radebaugh, and Sullivan

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Chapter 6

Governmental Influence on Trade

Chapter 6: Governmental Influence on Trade

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Learning Objectives

Explain why governments try to enhance and restrict trade
Show the effects of pressure groups on trade policies
Compare the potential and actual effects of government intervention on the free flow of trade
Illustrate the major means by which trade is restricted and regulated

The Learning Objectives for this chapter are

To explain the rationales for governmental policies that enhance and restrict trade
To show the effects of pressure groups on trade policies
To describe the potential and actual effects of governmental intervention on the free flow of trade
To illustrate the major means by which trade is restricted and regulated
To demonstrate the business uncertainties and business opportunities created by governmental trade policies

Learning Objectives

Demonstrate the business uncertainties and opportunities created by governmental trade policies
Discern how businesses may respond to import competition
Fathom how the growing complexity of products and trade regulations may affect the future

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Introduction

Protectionism - policies that
affect the ability of foreign producers to compete in your home market
limit or enhance your company’s ability to sell abroad or acquire needed foreign supplies

While free trade is beneficial, in reality all countries regulate the flow of goods and services across their borders. Governments want to help companies that are struggling, but it’s difficult to do so without hurting those that are doing well.

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Introduction

Physical and Social Factors Affecting the Flow of Goods and Services

This Figure shows the physical and social factors that affect the flow of goods and services.

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Conflicting Results
of Trade Policies

Governments intervene in trade to achieve economic, social, and political goals
Policymakers are challenged by
conflicting objectives
interest groups

Government officials use trade policy to try to achieve economic, social, and political goals. However, their efforts are hampered by uncertain and conflicting policy outcomes, as well as the goals of special interest groups.

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The Role of Stakeholders

Proposed policies on trade spark debate
Stakeholders include
Workers
Owners
Suppliers
Local politicians
Consumers usually don’t care

Proposed government policies often spark fierce debate among those who could be affected. Those who are most directly affected tend to be loudest in voicing their concerns.

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Economic Rationales for Governmental Intervention

Learning Objective:

Explain why governments try to enhance and restrict trade

Learning Objective : To explain the rationales for governmental policies that enhance and restrict trade.

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Economic Rationales for Government Intervention

Why governments intervene in trade
Economic rationales
Fighting unemployment
Protecting infant industries
Promoting industrialization
Improving comparative position
Non-economic rationales
Maintaining essential industries
Promoting acceptable practices abroad
Maintaining or extending spheres of influence
Preserving national culture

This Table shows the reasons for government intervention in trade. Notice that there are both economic and noneconomic reasons for intervention.

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Fighting Unemployment

Learning Objective:

Show the effects of pressure groups on trade policies

Learning Objective : To show the effects of pressure groups on trade policies.

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Fighting Unemployment

The unemployed are the most effective pressure group
But, import restrictions
can lead to retaliation by other countries
are less likely retaliated against effectively by small economies
are less likely to be met with retaliation if implemented by small economies
may decrease export jobs because of price increases for components
may decrease export jobs because of lower incomes abroad

Unemployed people are one of the most effective pressure groups for restrictions on imports. But, trying to fix employment problems using trade policy can create new challenges.

Costs that are often associated with import restrictions include higher prices and higher taxes. Governments must balance the potential for these costs with the benefits of creating new jobs. Fiscal and monetary policies may be more effective at correcting unemployment problems.

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Protecting ‘Infant Industries’

Learning Objective:

Compare the potential and actual effects of government intervention on the free flow of trade

Learning Objective : To describe the potential and actual effects of governmental intervention on the free flow of trade.

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Protecting ‘Infant Industries’

The infant industry argument
government protection of import competition is necessary to help certain industries evolve from high-cost to low-cost production
Used by developing countries

According to the infant industry argument, production becomes more competitive over time because of increased economies of scale and greater work efficiency. Therefore, if an emerging industry is protected during its infancy it has a greater chance for success.

Many developing countries use this argument as a rationale for implementing protectionist policies.

Keep in mind though that production costs may never fall far enough to make an industry competitive making it important to clearly identify those industries with the greatest chance for success. Even then, because of the costs involved, protectionism may not be automatic.

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Developing an Industrial Base

Countries promote industrialization because it
brings faster growth than agriculture
brings in investment funds
diversifies the economy
creates growth in manufactured goods
reduces imports and promotes exports
helps the nation-building process

Generally, countries with higher per capita GDP have larger manufacturing bases. So, countries that are trying to develop an industrial base may intervene in trade flows. The United States for example, has restricted imports to grow its manufacturing base.

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Economic Relationships
With Other Countries

Trade controls can be used
to improve the balance of payments
to gain fair access to foreign markets
comparable access argument
as a bargaining tool
believability and importance
to control prices
dumping
optimum-tariff theory

Countries can use trade controls to improve their relationships with other countries. In addition to using trade restrictions to improve the nation’s balance of payments, governments may also intervene in trade to ensure that domestic producers have the same access to other markets as foreign companies have to their markets, to encourage countries to change their policies, and to control prices.

Keep in mind that governments have to be careful when using trade restrictions to control prices. If prices get too high, it could result in smuggling or substitution. Similarly, if prices get too low, there’s an incentive to produce less or to shift foreign production and sales.

Trade restrictions can be used to prevent a practice known as dumping which involves exporting below cost or below home country prices, and to get foreign producers to lower their prices. According to the optimum tariff theory, a foreign producer will lower its prices if the importing company places a tax on its products.

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Noneconomic Rationales for Government Intervention

Noneconomic rationales include
Maintaining essential industries
Promoting acceptable practices abroad
Maintaining or extending spheres of influence
Preserving national culture

Sometimes governments may intervene in trade for political reasons including maintaining essential industries, promoting acceptable practices abroad, maintaining or extending spheres of influence, or preserving national culture.

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Maintaining Essential Industries

The essential industry argument
protect essential industries so the country is not dependent on foreign supplies during war
Countries must
determine which industries are essential
consider costs and alternatives
consider political consequences

The essential industry argument of protecting certain industries to avoid dependency on foreign supplies can be appealing, but keep in mind that in theory almost any product could be deemed essential.

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Promoting Acceptable
Practices Abroad

Import trade controls can be used
to promote changes in foreign countries’ political policies or capabilities
as a foreign policy weapon
to pressure governments to alter their stances on a variety of issues
human rights
environmental protection

Governments can use trade policy to encourage or discourage certain types of behavior by other countries.

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Maintaining or Extending Spheres of Influence

Governments provide assistance and encourage imports from countries that join a political alliance or vote a preferred way within international bodies
Cotonou Agreement
A country’s trade restrictions may coerce governments to follow certain political actions or punish companies whose governments do not

Trade restrictions can also be used to support a country’s sphere of influence.

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Preserving National Culture

In order to preserve national culture, countries
limit foreign products and services in certain sectors
Canada’s cultural sovereignty
prohibit exports of art and historical items deemed important to national heritage

Sustaining the collective identity that sets their citizens apart from those in other nations, is another reason why countries intervene in trade flows. Rice imports were strictly limited for years in Japan for example, because rice farming was considered to be a historically cohesive force in the country.

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Instruments of Trade Control

Learning Objective:

Illustrate the major means by which trade is restricted and regulated

Learning Objective : To illustrate the major means by which trade is restricted and regulated.

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Instruments of Trade Control

Two types of trade controls
those that indirectly affect the amount traded by directly influencing prices of exports or imports
those that directly limit the amount of a good that can be traded

There are many different ways to intervene in trade flows. It’s important to choose the right instrument to achieve a particular objective.

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Tariffs

Tariffs are also known as duties
refer to a government levied tax on goods shipped internationally
Tariffs may be levied
on goods entering, leaving, or passing through a country
for protection or revenue
on a per unit basis or a value basis
export tariffs
transit tariffs
import tariffs

Tariffs directly influence prices, while nontariff barriers affect either price or quantity. When a country assesses a tariff on a per unit basis it’s applying a specific duty. A tariff that’s assessed as a percentage of the item’s value is an ad valorem tariff. A compound duty is due when both a specific and an ad valorem tariff are assessed.

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Nontariff Barriers:
Direct Price Influencers

Subsidies
direct assistance to companies to make them more competitive
agricultural subsidies
overcoming market imperfections
valuation problems

Nontariff barriers can affect either quantity sold or price. Subsidies are one of the most common ways to influence price.

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Nontariff Barriers:
Direct Price Influencers

Aid and loans
tied
untied
Customs valuation
Other direct-price influences
special fees and requirements

In addition to subsidies which help companies be more competitive, other policies that affect price include aid and loans to help companies win contracts, arbitrary customs valuations, and other special fees and requirements that ultimately result in higher priced goods.

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Nontariff Barriers:
Quantity Controls

Quotas
limit the quantity of a product that can be imported or exported in a given time frame
Voluntary export restraint (VER)
Embargoes

The most common type of nontariff barriers that directly influence the quantity of imports are quotas which limit the quantity of a product that can be exported or imported. Voluntary export restraints and embargoes that prohibit all trade are types of quotas.

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Nontariff Barriers:
Quantity Controls

“Buy local” legislation
Standards and labels
Specific permission requirements
import or export license
Administrative delays
Reciprocal requirements
Countertrade or offsets
Restrictions on services

Other nontariff barriers affecting quantity include “buy local” legislation, special standards and labels, specific permission requirements, administrative delays, and reciprocal requirements.

Keep in mind that trade restrictions affect services as well as manufactured and agricultural products. Countries deciding whether to restrict trade in services consider essentiality, not-for-profit-preference, standards, and immigration.

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Dealing with Governmental Trade Influencers

Learning Objective:

Demonstrate the business uncertainties and business opportunities created by governmental trade policies

Learning Objective : To demonstrate the business uncertainties and business opportunities created by governmental trade policies.

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Dealing with Governmental Trade Influencers

Companies facing import competition can
Move abroad
Seek other market niches
Create greater efficiency or superior products
Try to get governmental protection

Companies facing losses because of import competition have several options.

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Tactics For Dealing
With Import Competition

Convince decision makers of the merits of particular policies
Involve the industry and stakeholders
Prepare for changes in the competitive environment

The tactics for dealing with import competition vary according to industry and business. It’s not always possible, for example, to simply shift production to another location or find new suppliers.

The development of an international strategy can help determine whether a company will benefit more from protectionist measures or from some other method of countering foreign competition.

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Dynamics and Complexity

Trade restriction changes bring about winners and losers among countries, companies, and workers
Gains to consumers from freer trade may come at the expense of companies and workers
The international regulatory situation is becoming more complex

Looking forward, there is likely to be both support for freer trade, and also support for more protectionism.

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All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the publisher. Printed in the United States of America.

COUNTRY A

Political policies and legal practices Cultural values, attitudes, and beliefs Economic forces Geographic influences

TRADE ENHANCEMENTS

TRADE RESTRICTIONS

COMPANIES’ COMPETITIVE

ENVIRONMENT

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COUNTRY B

Political policies and legal practices Cultural values, attitudes, and beliefs Economic forces Geographic influences

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